Oil Industry

Group 16:

Econ Project #1

Due: 16 October 2003

Introduction by Jamie Ifkovits:

Oil is certainly the world's largest cash commodity. One of the main products produced from crude oil is gasoline. Gas plays a significant role in the life of people in countries throughout the world. Gas accounts for approximately 17% of the energy consumed in the United States and is primarily used for powering automobiles ("A Primer on Gasolne Prices" 5 Oct 2003).

The prices paid by customers at the pumps reflects the price of production and delivery, the retail costs, and taxes ("A Primer on Gasoline Prices" 5 Oct 2003). By 1932 all of the states had excised taxes on gasoline and the federal government introduced its first tax on gasoline. As can be seen by Figure 1 in the Appendix, other countries experience more taxes per gallon of gas. England taxes almost five times as much per gallon of gas than the United States. This may be due to the fact that the US is third in producing the most barrels of oil per day (5.801) whereas England is not. This is evident on Figure 2 which can be found in the Appendix ("OPEC: Frequently Asked Questions" 5 Oct 2003).

OPEC reported in 2001 crude oil reserves stood at 1,074,850 million barrels of which 79% were in OPEC countries. They also reported that the world oil demand in 2000 was at about 76 million barrels per day. Oil is a limited resource and may one day run out. According to OPEC, there is enough oil in the member country's reserves to last another 80 years, while non-OPEC country's reserves might last only 20 years. This paper will attempt to look supply and demand by analyzing gasoline markets on many different levels ranging from the local market to the international market ("OPEC: Frequently Asked Questions" 5 Oct 2003).

Analysis of Supply and Demand by Nathan Decker

The law of supply states that "Ð'...the higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal". This means that there is a relationship with the price of a particular item and amount that will be sold. The law of demand states that "Ð'...there is a negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant". This means that there is an inverse in the price of something and the over all amount buyers will purchase. It is important to understand the supply and demand curve. The supply curve generally slopes from the bottom left corner of a graph to the upper right hand corner. This is because it starts off with the lowest price per unit which is realistically impossible to the highest price per unit which is also impossible. It tries to do in relation to the demand curve is find the place where the two curves intersect, to meet both the consumers and the producers' needs. Now the demand curve slopes just the opposite, from the upper left corner to the bottom right corner. It follows this pattern because if the price of an item goes up the buying will ultimately go down and vice versa. The goal of the supply and demand curve is ideally made to be consumer and producer friendly. Equilibrium is where the two curves intersect. The consumer gets his product for a price he thinks it worth and a producer is selling it for a price he thinks is in his best interest. Supply, demand, and equilibrium all come together in the supply and demand curve to help compliment each other and help balance our diverse economy.

Question 1 by Jeremy Simmons

If the number of gasoline stations were to increase then that means that there is a larger number of companies supplying the gasoline, and there is more gasoline in the area. This would force a change in the equilibrium. The change would be one that is a shift down to the right. The demand will remain the same as the shift occurs because the same amount of people want the gas, just more supply stations to obtain the gas. The price of retail gasoline will be forced to fall because there is a larger supply. This price fall is stated in the law of supply. There maybe a surplus, which would cause the price to fall more. The quantity will increase from Q1to Q2 because there is more gasoline in the area.

Question 2 by Jeremy Simmons

This increase in tax will initially be paid for by the suppliers. The prices will rise at about the same rate since all suppliers will be paying the same tax. This will cause the price in all gasoline stations to increase there prices by at least 50Ð'Ñž. Since the price has increased the quantity demanded will decrease. This is shown in the law of demand. Since the quantity demanded has decreased this means that there will be less gasoline sold because people will not want to pay the high prices for gasoline. The majority of the tax increase will be paid for by both the consumer and the suppliers. This is because of elasticity, but more so deadweight loss, which is "a reduction in the number of transactions that take place as a result of a tax increase (Miller 2001)".

Question 3 by Doug Miller

Prices for gasoline tend to be greater along the Pennsylvania Turnpike than they are at the turnpike exits. This happens because rest stop gas stations receive a greater volume of traffic than stations located at the exits. This increased number of vehicles visiting the gas station forces the demand curve to shift outward from its original position. The supply curve however, stays constant. There are no production factors that affect the supply curve in this case. This new intersection of supply and demand curves yield a slightly higher price than the original intersection, causing there to be a higher price for gasoline at turnpike rest stops along the turnpike than stations located at the exits.

Question 4 by Nathan Decker

Gas prices fluctuate daily because the price is based on the number of barrels that are shipped into the US and made available for sale. From the data collected on October 8, 2003 it is fair to say the State College gas prices differ from other prices in the state by 3 to 10Ð'Ñž. In State College the prices were for unleaded gas as fallows, Sheetz $1.49, Exxon $1.49, BP $1.49, Cheveron $1.52, and another Sheetz at $1.49. This is an average of $1.496 per gallon. This is because college students do not have much extra